There were many proximate causes of the ongoing Great Recession. People talk about the growing propensity to borrow and lend, the unregulated and risky nature of new financial innovations, and of course the unanticipated and quite rapid implosion of the housing market. All these things are true but it’s never good to mistake proximate causes for underlying ones. Now I’m no doctor of economics, and I realize that exclaiming knowledge of underlying causes is always problematic, but it seems to me that one of the most important underlying causes of the 2008 financial crisis, which has now led to the sovereign debt crisis in Europe and a global contraction in general, has been the widening gap between productivity gains and wage levels in the US that first emerged around 1980. Since then most of the benefits of post-WWII growth has gone to the financial class, not the class of wage-earners. And so we have the kind of inequality we have today. It’s important to note that stagnating wages didn’t necessarily cause rising inequality, as Jared Bernstein reminds us:
Correlation is not causation, and it would be wrong to argue that rising inequality caused the flatter middle-class income growth, post-1979. The literature has identified many factors that at least partially explain both of these developments …But the main point of this part of the analysis is that the post-1970s slowdown of real median family income growth is a) a key factor behind the middle class squeeze, and b) related to the increased inequality of income as the benefits of productivity growth eluded many in the middle class over the past few decades.
This rising inequality was due to a variety of things including productivity gains, the effects of globalization (off-shoring supply-chains and what not), the diminishing power of unions, and the rise of policies favoring the “holders of financial instruments over wage earners.”
Together, these phenomena applied downward pressure on wages. And just like the 1930s, rising productivity combined with falling wages can easily lead to plummeting demand and cause major problems. For a while the US economy was able to cope. Financiers leveraged up (or in the argot of the times, they innovated), credit markets boomed and Americans found ways to excessively borrow their way around relative poverty. But then the booming stopped.
Now, four years into this mess, the question is how to get out? I don’t have any answers; but I do think that regardless of where you stand on monetary loosening or tightening, fiscal austerity or stimulus, or whatever, the discrepancy between productivity gains and wages has to be acknowledged and dealt with. And you don’t have to enjoy reading Das Kapital to see this – flat wages are bad for everyone. If people don’t have money, they don’t buy the stuff/services they need/want and other people don’t profit from the sale of the stuff/services they create/produce/market/advertise/etc.
The global economy has been called, rightly, a plutonomy – and not just by your typical Marxist critic, the seminal paper examining today’s plutonomy was written by a Citibank analyst. The basic structure is like this: while the majority of humans are members of the cost-sensitive class, the plutocrat at the margins doesn’t really care about cost. And this insouciance makes him the ideal target for a company’s profit-growth. So we end up with all sorts of innovations on the luxury side of the market, where there are significant profit margins to be made, while the more general consumer is ignored.
Here’s the thing though, at a certain point it becomes in the interest of the plutocracy to make stuff more affordable to those at the middle and lower level of the production process. The consumer demand of the peasantry can’t forever be waved aside. And it shouldn’t be too difficult for these plutocrats to see. They are not your great grandfather’s aristocracy, they are actual workers themselves – only their compensation is exceptionally high. They could just continue to circulate goods, profits and investments amongst themselves, but the supply-chain they stand on is becoming increasingly unstable.
There are only so many Burkina Fasos left to run to in search of cheaper factors of production and richer margins of profit.
Of course, like the 1930s, it would be possible for America to stimulate itself out of this demand problem with some kind of works program (and, as in WWII, blowing up other countries works fine for this). But in the long run you’d likely want a program that addressed the social organization of production and the growing inability of most humans to enjoy the fruits of productivity growth.